“This doesn’t warrant the Fed turning more hawkish, as two additional rate hikes this year remain appropriate,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The Fed expects inflation to temporarily overshoot its inflation objective.”

The U.S. central bank increased interest rates early this month for a second time this year and forecast two more rate hikes by the end of 2018. Inflation is pushing higher in part because of a tightening labor market, which is characterized by a 3.8 percent unemployment rate.

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.2 percent after a similar gain in April. In the 12 months through May, the PCE price index surged 2.3 percent. That was the largest rise since March 2012 and followed a 2.0 percent increase in April.

That lifted the year-on-year increase in the so-called core PCE price index to 2.0 percent, the biggest gain since April 2012. The annual core PCE price index rose 1.8 percent in April. The core PCE index is the Fed’s preferred inflation measure.

U.S. financial markets were little moved by the data as investors kept a wary eye on developments surrounding growing tensions between the United States and its major trade partners.

Treasury Secretary Steve Mnuchin on Friday denied a report that President Donald Trump wanted the United States to withdraw from the World Trade Organization. The trade tensions are starting to hurt consumer morale. A survey by the University of Michigan showed consumer confidence dipping in late June and households’ near-term inflation expectations ticking up.

The dollar weakened against a basket of currencies. Prices for U.S. Treasuries fell while stocks on Wall Street were trading higher.

CONSUMER SPENDING COOLS

With inflation accelerating, consumer spending moderated. The government said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2 percent in May. Data for April was revised down to show spending rising 0.5 percent instead of the previously reported 0.6 percent jump.

Economists polled by Reuters had forecast spending gaining 0.4 percent last month. Spending was held back by a drop in outlays on household utilities. Purchases of long-lasting goods such as motor vehicles edged up 0.1 percent in May.

Nondurable goods purchases increased 0.6 percent, likely reflecting higher gasoline prices. Outlays on services ticked up 0.1 percent. The slowdown in consumer spending last month was also the result of households boosting savings.

When adjusted for inflation, consumer spending was unchanged in May after increasing by a downwardly revised 0.3 percent in the prior month. The so-called real consumer spending was previously reported to have increased 0.4 percent in April.

The Atlanta Fed is now forecasting second-quarter GDP rising at a 3.8 percent annualized rate instead of the 4.5 percent pace it had projected before the consumer spending data was released.

“Right now, the extended period of strong growth that so many are predicting is just a wish and a hope,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “Households seem to taking their tax cuts and saving them.”

Growth in consumer spending braked to a 0.9 percent annualized rate in the first quarter, the slowest pace in nearly five years, after rising at a 4.0 percent rate in the fourth quarter. The economy grew at a 2.0 percent pace in the first three months of the year.

Still, consumer spending remains supported by the robust labor market and lower income tax rates which came into effect in January. Last month, personal income rose 0.4 percent after gaining 0.2 percent in April. Wages increased 0.3 percent.

Savings rose to $482.0 billion in May from $448.0 billion in the prior month.